Impact of Companies Act on Private Companies, One Person ...Impact of Companies Act on Private...

Impact of Companies Act on

Private Companies, One Person company &

Corporate Social Responsibility

Ashish Makhija

Advocate

B.Com (Hons.), LLB, LLM (USA), LLM (India), FCA, FCMA

Standing Counsel for the Official Liquidator

Attached to High Court of Delhi

1

Member of:

The Pencil Parable

Pencil Parable

2

In the beginning, the Pencil Maker spoke to

the pencil saying,

"There are five things you need to know

before I send you out into the world. Always

remember them and you will become the

best pencil you can be."

You will be able to

do many great

things, but only

if you allow

yourself to be held

in Someone's

hand.

You will experience a painful

sharpening from time to time, but this

is required if you are to become a

better pencil.

You have the

ability to correct

any mistakes

you might make.

The most

important part

of you will

always be

what's inside.

No matter what the condition, you

must continue to write. You must

always leave a clear, legible mark no

matter how difficult the situation.

The pencil

understood,

promising to

remember, and

went into the

box fully

understanding its

Maker's purpose.

Now replacing the place of the pencil

with you; always remember them and

never forget, and you will become the

best person you can be.

You will be able to

do many great

things, but only if

you allow yourself

to be held in

someone's hand.

And allow other

human beings to

access you for the

many gifts you

possess.

You will experience a painful sharpening

from time to time, by going through

various problems, but you'll need it to

become a stronger person.

You will be able to correct mistakes you

might make or grow through them.

Three:

The most

important part

of you will

always be

what's on the

inside.

On every surface you walk, you must

leave your mark. No matter what the

situation, you must continue to serve

Good in everything.

Everyone is like a pencil...

created by the Maker for a unique and special

purpose.

By understanding and remembering, let us proceed

with our life on this earth having a meaningful purpose

in our heart.

Looking Back

Companies Act 1956

658 Sections (Effectively 881 Sections)

16 Schedules

66 Definitions

34 set of Rules & Regulations

Not yet repealed

155 Sections still in force

17

Looking Forward

Companies Bill 2009

426 Sections

No Schedules

93 Definitions

Phrase ―as may be prescribed‖ appeared ―235 times‖

in the Bill

18

Looking Forward

Companies Act 2013

470 Sections

7 Schedules

95 Definitions

Phrase ―as may be prescribed‖ appears ―346 times‖ in

the Act

46 sections of Part IX A of Companies Act, 1956

relating to Producer Companies will continue to apply

19

Companies Act 2013 - Status

President‘s Assent on 29th August 2013

98 Sections notified on 12th September 2013

Schedule VII & Section 135 notified on 27th February 2014

183 Sections notified on 26th March 2014

In all 282 Sections notified

Till date around 52 Circulars, 19 Notifications and 7 orders have

been issued on Companies Act, 2013

20

Companies (Removal of Difficulties)

Orders

21

Order

No

Date Particulars

1st 20.09.2013 Regarding implementation of Sections 24, 58 and

59

2nd 02.06.2014 Jurisdiction, Powers, authority and functions of

CLB—CLB shall exercise powers under Section 73

3rd 02.06.2014 Untill NCLT is constituted under section 408,

Board of CLB shall have all powers

4th 06.06.2014 Jurisdiction, Powers, authority and functions of

CLB—CLB shall exercise powers under Section 74

5th 09.07.2014 Clarification on Related Party Section 2(76) clause

v- Director is a Director and holds more than 2%

shares in Public Co shall be termed as Related

Party. The Word “or” was replaced by “and”

Companies (Removal of Difficulties)

Orders

22

Order

No

Date Particulars

6th 24.07.2014 Clarification on Related Party Section 2(76)(iv)-

After the word manager the word “or his relative”

is inserted

7th 04.09.2014 In section 143(5) of the Companies Act, 2013

amended. The definition of Government Companies

enhanced by substitution of words.

Major Circulars

23

Circular

No

Date Particulars

44/2014 14.11.2014 Extension of CLSS-2014 up to 31st December 2014

40/2014 15.10.2014 Disqualification u/s 164 shall lie for prospective defaults

38/2014 14.10.2014 The Board of a Section 8 Company would decide to refund

the deposit made under Section 160 proposing

appointment of a Director

34/2014 12.08.2014 CLSS-2014 introduced

32/2014 23.07.2014 Transitional Period for resolutions passed between 1st

September 2014 to 31st March 2014—Implementation

commenced before 1st April 2014 and available upto 1

year from passing of resolution or 6 months from the Act

Major Circulars

24

Circular

No

Date Particulars

30/2014 17.07.2014 Clarifications on Related Party transactions:-

a) Related Party shall refer to the parties related only in

a specific resolution

b) Corporate Restructuring/Amalgamations shall not

require approval under Section 188

c) No approval under Section 188 for approvals already

taken prior to commencement of Act, however, any

subsequent amendment would require approval

27/2014 30.06.2014 Extension of Date for filing of DPT-4 till 31st August 2014

25/2014 26.06.2014 Applicability of Resident Director--Previous Calendar

year shall commence from 1st April 2014 and will be till

31st December 2014. The Time period of 182 days will be

reduced accordingly

Major Circulars

25

Circular

No

Date Particulars

21/2014 18.06.2014 Clarification on CSR

8/2014 04.04.2014 Filing of B/s, Auditors Report, Boards Report as per

Companies Act, 1956

4/2014 25.03.2014 Clarification on Section 180—Resolutions passed u/s

293 prior to 12.09.2013 will be a sufficient compliance till

the period of one year from the date of notification of

Section 180

3/2014 14.02.2014 Clarification on Section 185—To maintain harmony between

Section 185 of CA 2013 & Section 372A(8)(d) of CA 1956 it

was clarified that till Section 186 is notified exemption to

holding company on giving loans/security/guarantee to its

Subsidiary under Section 372A (8)(d) shall be continued.

Understanding Layout

Divided in to 29 chapters

Chapter I – Applicability & Definitions – Section 1& 2

Chapter II – Incorporation, MoA, AoA – Sections 3 to 22

Chapter III – Prospectus – Sections 23 to 42

Chapter IV – Share Capital – Sections 43 to 72

Chapter V – Public Deposits – Sections 73 to 76

Chapter VI – Registration of Charges – Sections 77 to 87

26


Chapter VII – Management & Administration – Sections 88 to

122

Chapter VIII – Dividend – Sections 123 to 127

Chapter IX – Accounts – Sections 128 to 138

Chapter X – Audit & Auditors – Sections 139 to 148

Chapters XI, XIII, XIII – Directors, Board & Remuneration –

Sections 149 to 205

Chapter XIV – Inspection, Investigation – Sections 206 to 229

Chapter XV – Mergers – Sections 230 to 240

27


Chapter XVI – Oppression and Mismanagement – Sections 241 to 246

Chapter XVII – Registered Valuers – Section 247

Chapter XVIII – Removal of Names of Companies – Sections 248 to 252

Chapter XIX – Revival – Sections 253 to 269

Chapter XX – Winding –up – Sections 270 to 378

Chapter XXI – Companies Authorized to Register Under the Act –

Sections 366 to 374

Chapter XXII – Foreign Companies – Sections 379 to 393

28


Chapter XXIII - Government Companies – Sections 394 & 395

Chapter XXIV – Registration Offices & Fees – Sections 396 to

404

Chapter XXV – Companies to furnish Information – Section

405

Chapter XXVI – Nidhis – Section 406

Chapter XXVII – NCLT – Sections 407 to 434

Chapter XXVIII – Special Courts – Sections 435 to 446

Chapter XXIX – Miscellaneous - Sections 447 to 470

29


Schedule I – Table A to I

Schedule II – Depreciation

Schedule III – Balance Sheet

Schedule IV – Code for Independent Directors

Schedule V – Managerial Personnel

Schedule VI – Infrastructural Projects

Schedule VII – Activities for CSR Policy

30

Companies (Amendment) Bill,

2014

Omitting requirement for minimum paid up share capital - Government to retain power to specify

Making common seal optional

Prescribing specific punishment for deposits accepted under the new Act This was left out in the Act inadvertently. (To remove an omission)

Prohibiting public inspection of Board resolutions filed in the Registry -

Resolutions

Including provision for writing off past losses/ depreciation before declaring dividend for the year( Was left in Act but included in Rules)

17

19 Matters – To be Passed at Board Meeting only

To make Calls

Buy-back of Shares authorization

Issuing Securities

Borrowings

Investments

Grant of Loans etc

Approval of Financial Statements


Diversification of Business

Merger, Amalgamation etc

Acquisition or Takeover

Political Contributions

KMP appointment/removal

Taking Note of appointment/removal of one level below KMP


Internal/Secretarial Auditors appointment

Taking note of Directors’ Interest

Buy/Sell Investments - ≥ 5% of PUC & Free Reserves

Invite or Accept Deposits

Changing Terms of Deposits

Approval of quarterly, half yearly and annual financial results


2014 Rectifying the requirement of transferring equity shares for which

unclaimed/unpaid dividend has been transferred to the IEPF even

though subsequent dividend(s) has been claimed. (Section 124)

Enabling provisions to prescribe thresholds beyond which fraud shall be reported to the Central Government (below the threshold, it will be reported to the Audit Committee). Disclosures for the latter category also to be made in the Board‘s Report. (Demand of auditors)

Exemption u/s 185 (Loans to Directors) provided for loans to wholly owned subsidiaries and guarantees/securities on loans taken from banks by subsidiaries. (This was provided under the Rules but being included in the Act as a matter of abundant caution).

18

Section 124

(6) All shares in respect of which unpaid or unclaimed dividend has been

transferred under sub-section (5) shall also be transferred by the company in

the name of Investor Education and Protection Fund along with a statement

containing such details as may be prescribed

Proposed Amendment

(6) All shares in respect of which dividend has not been paid or claimed for

seven consecutive years or more shall be transferred by the company in the

name of Investor Education and Protection Fund along with a statement

containing such details as may be prescribed

―Explanation.—For the removals of doubts it is hereby clarified that in case any

dividend is paid or claimed for any year during the said period of seven

consecutive years, the share shall not be transferred to Investor Education and

Protection Fund.‘‘.

36


2014

Empowering Audit Committee to give omnibus approvals for

related party transactions on annual basis. (Align with SEBI policy

and increase ease of doing business)

Replacing ‗special resolution‘ with ‗ordinary resolution‘ for

approval of related party transactions by non-related

shareholders. (Meet problems faced by large stakeholders who

are related parties)

Exempt related party transactions between holding companies

and wholly owned subsidiaries from the requirement of approval

of non-related shareholders. (corporate demand)

19


2014

Bail restrictions to apply only for offence relating to fraud u/s

447. (Though earlier provision is mitigated, concession is made to

Law Ministry & ED)

Winding Up cases to be heard by 2 member Bench instead of a 3

member Bench. (Removal of an inadvertent error)

Special Courts to try only offences carrying imprisonment of two

years or more. (To let magistrate try minor violations).

20

Understanding Companies Act

New Concepts

Associate Companies

Significant Influence

Control of 20% of total share capital, or

control of business decisions under an agreement


New Concepts

Small Companies

Other than Public Company

Paid up capital does not exceed Rs. 50 lakhs, and

Turnover does not exceed Rs. 2 Crores

Does not include -

Holding Company or Subsidiary Company

Section 8 Company


New Concepts

Companies can obtain dormant status

Inactive Company

Not Carrying any business or not made any significant accounting transaction for last 2 years, or

Not filed B/s or Annual Return for last 2 FYs

Company formed under CA 2013 for a future project or holding an intellectual property and has no significant accounting transaction


New Concepts

Foreign Company

Company or Body Corporate

Having a place of business in India

By itself, or

Through an Agent, or

Through Electronic Mode

And

conducting any business activity in India in any other manner

Statutory Framework

Section 447 – If found guilty of fraud, shall be

punishable with imprisonment for a term which

shall not be less than six months but which may

extend to ten years and shall also be liable to

fine which shall not be less than the amount

involved in the fraud, but which may extend to

three times the amount involved in the fraud

Provided that where the fraud in question

involves public interest, the term of

imprisonment shall not be less than three years.

Statutory Framework

Explanation.—For the purposes of this section—

(i)―fraud‖ in relation to affairs of a company or

any body corporate, includes any act, omission,

concealment of any fact or abuse of position

committed by any person or any other person

with the connivance in any manner, with intent

to deceive, to gain undue advantage from, or to

injure the interests of, the company or its

shareholders or its creditors or any other person,

whether or not there is any wrongful gain or

wrongful loss.

Exemptions to Private

Companies

-

Draft Notification for Private

Companies


Companies S.

No Chapter/ Section number/ Sub-

section(s) in the Companies Act,

2013

Exceptions/ Modifications /Adaptations

1 Chapter IV, section 43 (Kinds of

Share Capital) and section 47

(Voting Rights) [Both whole]

Shall not apply

2 Chapter IV, clause (a) of sub-section

(1) of section 62) and sub-section (2)

of section 62

Rights Issue

Shall apply with the following modification:- Words

‗not being less than fifteen days and not exceeding

thirty days‘ shall be substituted with ‗not being less

than seven days and not exceeding fifteen days‘

3 Chapter IV, clause (b) of sub-section

(1) of section 62

ESOP

Shall apply except that instead of special

resolution, ordinary resolution would be required


Companies

S.No Chapter/ Section number/ Sub-


2013


4 Chapter V, sub-section (2) of

section 73

Deposits

Shall not apply to private companies having 50 or

less number of members if they accept monies

from their members not exceeding twenty five per

cent of aggregate of the paid up capital and free

reserves or one hundred per cent of the paid up

capital, whichever is more, and which inform the

details of such monies to the Registrar in the

prescribed manner

5 Chapter VII, sections 101 to 107

and section 109[All whole]

Provisions relating to General

Meeting

Shall apply unless

- otherwise specified in respective sections or

- unless articles of the private company otherwise

provide

6 Chapter X, Clause (g) of sub-

section (3) of section 141

Eligibity of Auditors

Shall not apply in respect of appointment of

auditors by private companies


Companies

S.No Chapter/ Section number/ Sub-


2013


7 Chapter XI, section 160( Whole)

Right of persons other than

retiring directors to stand for

directorship

Shall not apply

8 Chapter XI, section 162 [Whole]

Appointment of Directors to be

voted individually

Shall not apply

9 Chapter XII, Section 180

Restriction on Powers of Board

Shall not apply to private companies

having 50 or less number of

members


Companies S.No Chapter/ Section number/ Sub-

section(s) in the Companies Act, 2013


10 Chapter XII, section 185

Loans to Directors

Shall not apply to Private companies -

(a) which have borrowings from banks or financial

institutions or any bodies corporate not more than twice

of their paid up share capital or Rs. 50 crore, whichever is

lower; and

(b) in whose share capital no other body corporate has

invested any money‖.

11 Chapter XII, section 188

Related Party Transactions

Shall not apply

12 Chapter XIII, section 196, sub-section (4)

and subsection(5)

Remuneration to Managerial

Personnel

Shall not apply

13 Chapter XIII, sub-section (3), section 203

Appointment of key Managerial

Personnel

Shall not apply

Impact of

Companies Act, 2013

on

Private Companies

Impact on Private Companies

S.N

o

Basis of

Comparison

Companies Act, 1956 Companies Act, 2013

1 Definition No of members restricted to 50 No of members restricted to 200

Prohibited any invitation or

acceptance of deposits from

persons other than its

members, directors or their

relatives

Section 3(1)(iii)

No such prohibition

Section 2(68)

2 Commencement

of Business

No need to seek any such

certificate

Section 149

Even a private company needs to

give a declaration before

commencing its business or

making any borrowings

Section 11

3 Further issue of

shares

Provisions relating to Rights

issue and Preferential

allotment not applicable

Section 81 & 81(1A)

Needs to comply with all

provisions relating to issue of

capital

Section 62


S.No Basis of

Comparison

Companies Act,

1956

Companies Act, 2013

4 Acceptance of

Deposits

A private Company

can accept

Deposits/ Loans

from Directors,

Relatives of

Directors and

Shareholders

Section 3(1)(iii)

Exemption retained only for Directors

A private company needs to comply

with the provisions of Section 73 read

with Companies (Acceptance of

Deposit) Rules, 2014 if loan/deposit

accepted from Shareholders/Relatives

of Directors

MCA vide circular no 5/2015 clarified

that amounts received by private

companies from their members,

directors or their relatives before 1st

April, 2014 will not be treated as

Deposits, provided details of same is

given in financial statements


S.No Basis of

Comparison


5 Appointment

of Key

Managerial

Personnel

Irrespective of Capital,

Private Companies were

not mandated to

comply with provisions

of remuneration of

WTD/MD/ CS

Appointment of

MD/WTD/Manager was

mandated for

companies with paid up

capital of Rs. 5 Crores

or more

Section 269 and 383A

Need to comply with provisions of

remuneration also (Section 196 and

197)

All public companies having paid-up

capital of Rs. 10 Cores or more are

required to appoint a whole-time KMP

(Section 203 read with Rule 8 of

Companies (Appointment &

Remuneration of Managerial

Personnel) Rules, 2014

All private companies having paid up

capital above Rs.5 Cores or more shall

be mandated to appoint a Whole-Time

Company Secretary (Rule 8A)


S.No Basis of

Comparison


6 Loans to Directors Restrictions relating to

giving of loans,

advances or providing

securities, guarantees

to directors and other

interested entities were

not applicable

Section 295

All companies including private

companies are restricted from

giving loans, advances or

providing securities, guarantees

to directors and other interested

entities.

Section 185

7 Resident Director No such requirement All companies mut have atleast

one director who has stayed in

India for a minimum period of

182 days during the previous

calendar year

Section 149


S.No Basis of

Comparison


8 Consent to act as

Director

Consent to act as

director was not

mandatory to be filed

with ROC

Section 264

Mandated for Private Companies

also

Section 152

9 Appointment of 2 or

more directors by

single resolution

Provisions relating to

appointment of

directors to be voted on

individually were not

applicable

Section 263

At a general meeting, a motion

for the appointment of two or

more persons as directors of the

company by a single resolution

shall not be moved unless a

proposal to move such a motion

has been agreed to at the

meeting without any vote being

caste against it.

Section 149


S.No Basis of

Comparison


10 Limit on Number of

Directorship

Private Co‘s not

counted for limit of 15

companies

Section 275

A person can act director in

maximum 20 companies, out of

which not more than 10

companies should be public

Section 165

11 Corporate Social

Responsibility

No such requirement

Section 263

Private Companies having net

worth of Rs.500Crore or more or

tunover of Rs. 1000 Crore or more

or a net profit of Rs. 5 Crore or

moreneed to spend atleast 2% of

average net profits on CSR

Section 135


S.No Basis of

Comparison


12 Content of Financial

Statements

Balance Sheet

Statement of Profit &

Loss

Cash Flow Statement

applicable to certain

class of companies (AS-

3 applicable on

companies having

turnover excess of 50

Crores or borrowings

excess of Rs.10 Crores)

Balance Sheet

Statement of Profit & Loss

Cash Flow Statement

Statement of Changes in equity

Notes to Accounts

13 Maximum Term of

Auditor

Upto AGM

Section 224

Mandatory rotation of Auditors

after a term of 5 years/ 10 years

Section 139


S.No Basis of

Comparison


14 Provisions relating to

General meetings

Private Companies were

exempt from the

applicability of Section

171 to 186, if

authorised by Articles

No such exemption available.

15 Inter Corporate

Investments/

Loans/Guarantee

Provisions of Section

372A were not

applicable

Except sub-section (1) of Section

186, other provisions on Inter

Corporate

Investments/loans/Guarantees are

applicable.

Section 186

Filing of MGT-14 Excluded

Notification GSR. 206E dated 18th March, 2015

Following item numbers and the entries relating thereto shall be omitted :

(3) to take note of appointment(s) of removal(s) of one level below the key managerial personnel;

(5) to take note of the disclosure of director‘s interest and shareholding;

(6) to buy, sell investments held by the company (other than trade investments), constituting five percent or more of the paid up share capital and free reserves of the investee company;

(7) to invite or accept or renew public deposits and related matters;

(8) to review or change the terms and conditions of public deposit;

(9) to approve quarterly, half yearly and annual financial statements or financial results as the case may be.

One Person Companies

Section 2(62)

OPC

One Person Company [Section 2(62)]

Only one person as member, will be a private company

MOA of company shall indicate the name of a person who

in the event of the death of subscriber shall become the

member

Only a natural person is eligible to form OPC or be a

nominee

No person shall be eligible to incorporate or become

nominee for, more than single OPC

61

Types of OPC

a company limited by shares; or

a company limited by guarantee; or

an unlimited company.

Appointment of Director in

OPC

Articles of a company may provide for the appointment of the first directors

If articles are silent then the subscriber to the memorandum who is an individual shall be deemed to be the first director of the company

May have a single director

Maximum-15 directors more than 15 after passing Special Resolution

Director must have stayed in India for a total period of not less than 182 days in the previous calendar year

Meeting of Board

At least one meeting of the Board of Directors to conducted in each half of a calendar year

Gap between the two meetings should not be less than ninety days

Exemption – if company has only one director.

Contract by OPC

One Person Company limited by shares or by guarantee enters into a contract with the sole member of the company who is also the director of the company, the terms of contract or offer are in writing or contained in a memorandum or recorded in the minutes of the Board meeting held next after entering into the contact.

Inform the Registrar about every contract entered into by the company within a period of fifteen days of the date of approval by the Board of Directors.

Contracts in ordinary course of business not required to comply with the above.

Financial Statement

The financial statement, signed by one director, for submission to the auditor for his report thereon.

Board of Directors Report means a report containing explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report.

Filed with ROC within 180 days from the closure of the financial year

Financial statement, may not include the cash flow statement

Exemptions

Section 96. Option to dispense with the requirement of holding an AGM

Section 98. Power of Tribunal to call meetings of members

Section 100. Calling of extraordinary general meeting.

Section 101. Notice of meeting.

Section 102. Statement to be annexed to notice.

Section 103. Quorum for meetings.

Section 104. Chairman of meetings

Section 105.Proxies

Section 106. Restriction on voting rights

Exemptions

Section 107. Voting by show of hands

Section 108. Voting through electronic means

Section 109. Demand for poll

Section 110.Postal ballot

Section 111. Circulation of members‘ resolution

OPC- Miscellaneous provisions

OPC cannot be converted into Section 8 Co., carry NBFC activities

No minor shall become member or nominee of the One Person

Company or hold share with beneficial interest.

No OPC can voluntarily convert into any kind of company unless two

years is expired from the date of incorporation of OPC, except its

turnover/ capital increases from threshold limits

Mandatory conversion to Private Co/ Public Co. with requisite number of

directors & shareholders if threshold limit crosses:

Paid up Capital: Rs. 50 Lacs

Average Annual Turnover: Rs. 2 Crores

69

Thank you for your patience!

Ashish Makhija

#9810128356

[email protected]

70

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